Outlook
The medium-term outlook remains favorable with the expectation that the ongoing capital investments will generate revenues, accompanied by rents from foreign military bases. Growth could reach 7% in 2017-2019, before decelerating to 6% by 2020. The fiscal position should gradually improve, narrowing to low single digits in 2017-2018, on the assumption that current investments will create new production and export capacity, that spending is rationalized, and that fiscal reforms to increase revenues and reduce fuel subsidies are implemented effectively. The current account deficit is projected to decline to 14.5% of GDP by 2018, with a gradual pick up in exports while construction and related imports soften as the infrastructure projects near completion.
FDI inflows and capital transfers should continue to finance the deficit. Reserves are expected to continue to guarantee adequate currency board and import coverage (of well over four months of imports), thus allowing the peg of the exchange rate at 177.72 Djiboutian Franc per 1US$ to be sustained. Inflation is projected to remain at 3.5% in 2017-2018 as demand in the housing and services sectors remains strong.
As growth is mainly driven by infrastructure investments, its impact on job creation and poverty reduction is expected to be limited. The government is currently implementing a program to promote employment opportunities, improve nutrition practices, and provide transfers to reduce poverty among the most vulnerable groups.
Political harmonization and social unification are key to ensure political and social stability. To ensure macro-economic stability, the government needs to engage in reforms to rationalize spending and effectively implement fiscal reforms to improve the business environment and increase domestic resources mobilization. Labor market reforms to better match labor supply and demand, and economic diversification towards light manufacturing and agricultural sectors with potential for jobs creation, are imperative to address the country’s growing unemployment and poverty issues.
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